What is the primary purpose of private mortgage insurance (PMI)?

Private mortgage insurance (PMI) serves a crucial role in the realm of real estate financing, particularly for borrowers who are unable to make a substantial down payment on their home. The primary purpose of PMI is to protect the lender in the event that the borrower defaults on the mortgage loan.

When a borrower puts down less than 20% of the home’s purchase price, lenders consider this higher risk. PMI mitigates that risk by compensating the lender for a portion of their loss if the borrower fails to meet the obligations of the loan. Essentially, when a borrower defaults and the home is sold (often at a loss), the PMI covers some of that loss, making it less risky for lenders to extend credit to borrowers with smaller down payments.

Other options like insuring the property against loss, assisting the borrower in loan management, or enhancing the borrower’s credit score, do not reflect the actual function of PMI. While homeowners do need property insurance to protect their investment, PMI specifically pertains to protecting the lender's interests without impacting the borrower's credit standing or helping them manage their loans.